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Market Overview

During the past several years, Armenia has experienced an impressive expansion in
investment, in exports, and in real incomes. This has been the result of stabilizing fiscal
and monetary policies, continued economic reforms, and substantial support including
significant flows of remittances, from the Armenian Diaspora--meaning both
longstanding Diasporan communities in the U.S. and elsewhere, and also more recent
Armenian emigrants, especially to Russia. Nevertheless, poverty is still high, and the
sustainability of growth remains a concern. The economic reform agenda remains
unfinished.

 Real GDP growth for the period 2001 - 2006 has been strong, rising from 9.6%
per annum in 2000 to 13.9% in 2005 and reaching 13.4% in 2006. The Armenian
government (reasonably) predicts 9% growth in GDP during 2007. Construction and
agriculture remain leading sectors; foreign trade turnover for January-December 2006
grew by 15.9 %, while imports growth amounted to 21.8%.

 Armenia's main trade partners in the period January - November 2006 were the
Russian Federation (13.2% of total trade turnover), Germany (9.5%), Belgium (7.5%),
Israel (6.4%), the Ukraine (6.1%) and the USA (5.4%). According to the National
Statistical service of Armenia, trade volumes between the USA and Armenia for January
- November 2006 were $152.7 million. Armenia's main imports from the USA were
precious stones and metals, mineral fuels and oils, chemical products, means of
transportation, machinery and equipment, textile articles, etc. Armenia's primary export
items to the USA included precious stones and metals, textile and prepared food
products.

 The high official rates of economic growth have not been accompanied by a
commensurate increase in employment or reduction in poverty. According to the latest
"Armenia's Social Picture and Poverty" report published by the National Statistical
Service in 2006, citing data from a 2004 household survey, 34.6% of the population still
lives below the official poverty line.

 The Armenian Government's Poverty Reduction Strategy Paper (PRSP)--also
Armenia's de facto development strategy--aims to reduce the poverty rate to less than
20% by 2015. The PRSP aims to accomplish this by increasing social expenditures
while providing for steady growth of private enterprise to increase the tax base.

 Armenia's accession to the WTO in 2003 and progress in privatization contribute
to an improving business climate. With United States Agency for International
Development (USAID) and World Bank assistance, the government has been
implementing an ambitious program of reforms aimed at restructuring the banking and
financial services sector, liberalizing trade, attracting foreign investment through
improved tax and customs regimes, establishing a Western accounting system, and
implementing a private property regime. However, many reforms remain incomplete,
and the government will have to show strong political will to make necessary changes,
especially in the tax and customs services.

 Corruption, nepotism and interference by state authorities, uneven and
unpredictable application of laws (particularly those relating to enforcement of contracts,
bankruptcy and registration of property rights) and a weak banking sector remain serious
constraints on business.

 Due to Armenia's closed borders with neighboring Turkey and Azerbaijan, nearly
all goods traded with Armenia must transit Georgia, where high transport tariffs are
imposed, impeding growth in Armenia's external sector. Long-term economic prospects
depend significantly on whether Armenian will be successful in resolving the Nagorno-
Karabakh conflict, and in establishing normal diplomatic and trade relations with Turkey
and Azerbaijan.

 In the period of January - September 2006 the total inflow of Foreign Direct
Investment (FDI) in Armenia was $149.04 million. Greece has been the largest investor
in the country since 1991, followed by Russia. Total American FDI in Armenia was
approximately $235 million. Main sectors of the economy of Armenia attracting foreign
investment have been telecommunications, power and utilities, food processing, mining
and metallurgy, trade, construction, information technologies and hotel services..

 Armenia receives one of the world's highest levels of assistance per capita.
United States Government assistance to Armenia was $74.4 million in fiscal year 2006,
and totals more than $1.7 billion since 1992. In addition, the IMF, World Bank, and
EBRD, as well as other financial institutions and foreign countries, have extended grants
and loans to Armenia exceeding $1 billion since 1993.

 The Millennium Challenge Corporation has signed a contract with Armenia
valued at $235.65 million. MCC's first transfer of $1.38 million was disbursed in
December 2006

Market Challenges

The Armenian government has recognized the need to create a more inviting business
environment. In 2005, President Robert Kocharian announced important reforms of the
tax and customs administration, many of which have been realized. The government
also has ongoing programs to strengthen the financial intermediation role of the banking
sector, improve governance in the administration of public services, and minimize
corruption and interference by state authorities. The government's Poverty Reduction
Strategy Paper and Anti-Corruption Strategy Paper (2004-2007) outline plans for reform
in broad terms, but fail to address structural reforms and deregulation. The Action Plan
of the Anti-Corruption Strategy Paper expired at the end of 2006. While a new draft
strategy has been circulated, it has not yet been approved. The business climate will
likely remain difficult, as vested interests continue to be the main impediment to good
governance.
Maintaining economic growth and progress will depend on positive political
developments as well. The trade embargo imposed by two of Armenia's four neighbors -
Turkey and Azerbaijan - is a major impediment to development. Transport costs
through Georgia are expensive. Trade with Iran is small, restricted by poor
transportation links (bad roads, no railroad) and by the fact that the portion of Iran
adjacent to Armenia is a remote and underdeveloped region . U.S. involvement in trade
with Iran is also limited by the Iran Sanctions Act (formerly Iran-Libya Sanctions Act,
ILSA), and the risk of new sanctions which might be imposed by the United Nations, in
connection with Iran's illicit nuclear programs.

Market Opportunities

Due to Armenia's small domestic market and the high transport costs, there are still
relatively few--but growing--opportunities for traditional direct export of American
products. While many American goods do make it to Armenia, many are resold from
dealers in neighboring countries, at times without authorization from the original
producer. The best opportunities for export probably lie in the services sector, including
international financial services, or services that require direct investment in Armenia,
such as travel and tourism. American brand names are often highly regarded in
Armenia, creating yet-untapped opportunities for franchising and distributorships in
consumer-oriented sectors.
There is greater opportunity in Armenia for foreign direct investment. Foreign investors
can benefit from largely unexploited assets, a favorable trade regime both with the CIS
and with the West, and Armenia's relatively skilled workforce and low wages. However,
occasional, opaque, transaction-driven economic policy decisions have called into
question the government's commitment to welcoming foreign investment.

Market Entry Strategy

In the past, doing business in Armenia in almost all cases required having someone on
the ground. However, some foreign businesses now report success at establishing
trade relationships in Armenia without a preexisting local network. All business
representatives underscore the need to have a strong understanding of local legislation,
particularly tax and customs legislation, in order to avoid paying unnecessary fees.
Communications networks have noticeably improved in the past eighteen months, and
additional telecommunications investments continue, though service quality and
availability still lag behind the European norm. The importance of person-to-person
contact in the Armenian business culture cannot be overemphasized. While some
Western-style legal consultancies exist to help find partners or perform due diligence,
their capacity to act as responsible agents is limited, largely due to the lack of
transparency in the business culture as a whole. Most successful foreign investors have
Armenian partners who are familiar with the local business environment.